Financial Institutions Group

General Partner (GP) stakes strategies continue to proliferate and attract assets. However, given market volatility, it is important to assess the outlook for GP stakes investing.

GP investors take minority ownership positions in the underlying management companies of alternative asset managers. Skilled aggregators in this space, such as Blue Owl’s Dyal Capital, Blackstone GP Stakes and Goldman Sachs’ Petershill Partners, typically invest in managers across a range of strategies to cultivate diversified portfolios that generate strong risk-adjusted returns. Targets often fall into one or more of the following buckets: buyout, growth equity, credit, real estate or infrastructure.

Here, the return profile tends to correlate with the strategies of the underlying portfolio. Diversified portfolios invested in managers across a range of strategies will tend to perform best through all market conditions as this approach ensures a more even mix of income derived from management fees and incentive fees. The current market headwinds of rising inflation and higher interest rates is likely to incentivize Limited Partner investors to hold assets in real estate, infrastructure, and floating rate credit — areas which tend to perform well under these conditions. Institutional demand for these types of strategies has been relatively strong in 2022.

However, buyout and growth equity-focused managers have been challenged given the combined impact of eroding portfolio company margins and lower valuations from higher discount rates.

Certainly, these conditions could lead to more downward pressure on buyout and growth equity-concentrated GP stakes portfolios. However, some maintain that the worst of the negative valuation effects may be behind us. Asset classes have largely re-rated in the last six months. For instance, investor appetite for private credit strategies has improved in recent months as structures and yields have become more attractive. Meanwhile, private equity firms are investing more capital in their holdings, positioning their portfolios to hold relatively lower levels of leverage as floating rate debt becomes more expensive. Against this backdrop, the pace of GP stakes deals is expected to pick up in the second half of 2022 as dry powder remains robust and managers seek a partner to help navigate market volatility with strong balance sheets and expert advice.